FG Sets Aside N177bn to Retire Maturing Bonds

• FG Sets Aside N177bn to Retire Maturing Bonds

The Federal Government has set aside a total of N177.46bn in the 2017 budget as a sinking fund to retire maturing bond obligations.

A sinking fund is a part of a bond agreement that requires the issuer to regularly set money aside in a separate custodian account for the exclusive purpose of redeeming the bonds.

The N177.46bn allocated in the 2017 budget is N6.02bn higher than N113.44bn allocated for the same purpose in the 2016 fiscal period.

The proposed spending is contained in the 2017 budget, which was submitted to a joint session of the National Assembly by President Muhammadu Buhari on December 14, 2016.

The N7.3tn budget has a total capital vote of N2.24tn, representing 30.7 per cent, while the recurrent component stood at N2.98tn, with the rest allocated for debt servicing.

Findings revealed that the sinking fund of N177.4bn would be used by the government to settle maturing obligations arising from its domestic indebtedness.

The government usually approaches the domestic bond market to raise funds to meet its short-term obligations such as payment of salaries.

The domestic debt of the government as of the end of June last year stood at about N10.6tn, made up of N7.47tn Federal Government of Nigeria bond; Nigerian Treasury Bills, N2.9tn; and Treasury Bonds, N230.9bn.

The Debt Management Office had in a document entitled: ‘Nigeria’s Debt Management Strategy 2016-2019’, stated that at least 30 per cent of the nation’s domestic debt would fall due within the next one year.

Given the country’s diminishing revenue profile as a result of dwindling oil and gas revenue, refinancing the debt has become a challenge to the government.

According to the DMO, refinancing the 30 per cent component of the domestic debt poses high risk to the economy because of high interest rates.

It stated, “The interest rate risk is high, since maturing debt will have to be refinanced at market rates, which could be higher than interest rates on existing debt.

“The foreign exchange risk is relatively low given the predominance of domestic debt in the portfolio.”

The Registrar, Chartered Institute of Finance and Control of Nigeria, Mr. Godwin Eohoi, said that with the drop in revenue, it would be difficult to refinance the domestic debt, adding that this might lead the country into another debt trap.

He said, “We have about N1.6tn as debt repayment out of the N7.3tn budget and this is very high. Why should we be using about 25 per cent of the budget to repay debt that we have spent? The interest rate is too high.

“There is nothing bad in borrowing but we should borrow heavily for infrastructure purpose and with the level of revenue challenges we are having in the country, it will not be easy servicing some of these debts.”